He writes about his first bear market, which occurred just after the turn of the millennium. At the time, I was a medical student and was minimally invested in an IRA and not paying a whole lot of attention, and certainly not adding to my investments. I was only adding to my student loan balances.

However, I did finish my training in 2006, ten years after Vagabond MD, and experienced my first big bear market a couple of years later. It was unnerving to see the value of my early SEP-IRA investments plummet, but I managed to stay the course while also dumping money into building a home (which also turned out to be a rotten idea when we did so in 2007).

But this post isn’t about me; it’s about Vagabond MD and his first bear market. Take it away, doc!

My First Bear Market

For the younger docs, especially those who have not (yet) suffered through a bear market (at least at the time of my writing this in 2018), I thought I would take myself back to the 2000-2002 bear market and how I felt when the stock market was seemingly crashing all around me.

For the backdrop, the mid-to-late 1990’s were quite a bit like now (mid 2010’s). I am not talking about the internetstock-driven “irrational exuberance” of the late 90’s, but the steady upward trend in tech stocks and blue chip stocks that occurred as I was finishing training and starting my real job in 1996.

Now that I was earning real doctor money, I felt urgent pressure (bordering on obsession) to get my money into the stock market ASAP or I would surely miss out on the elixir that was making everyone else around me fabulously wealthy.

You could not walk into the hallowed Doctor’s Lounge without hearing about colleagues’ great skill at buying tech darlings and the huge profits that were piling up. There were, for sure, a few short-lived drawdowns (Long Term Capital, the so-called “Asian Contagion”, etc… but nothing major. And the market seemed to always snap back.

And then, rather suddenly, it didn’t.

The Tech Bubble Bursts

The tech bubble peaked in March of 2000, and burst, followed 18 months later by 9/11, bringing down the largest, most heavily invested segments of the US stock market.

There were some niche exceptions. I caught the small/value bug early and invested in this space via actively managed funds (Oakmark and Third Avenue Funds), and there were a few other small pockets of resilience in my portfolio (bonds and international stocks).

Alas, my portfolio, like those of just about everyone else, was overweight in the large cap and tech stalwarts of the 90’s and was crushed. Thank you, Cisco!

As the two year bear market dragged on, it became disheartening to see the value of my portfolio tanking, even with regular retirement fund contributions and additions to a taxable account.

Our retirement fund allocations were via a Profit Sharing Plan, and we received our allocations quarterly. I would get a $12,000 or so allocation in the beginning of March, and by the end of March, my portfolio would be down $15k, $25k or more, despite the recent additions (which is quite the opposite of what we had been experiencing then or more recently).

It felt like I was throwing money into a black hole. I did not capitulate and sell out of equities, but I did shift things around a bit, to better diversify my portfolio. Eventually, my interest in feeding the bear marketbeast was wavering.

Investing in Fun Instead

At some point, I started diverting more funds into consumptions (vacations, hobbies, home remodeling, etc.). I remember when asked by a senior partner what I was going to do with a semi-annual bonus check in 2002, I told him that I was going to “invest in fun.”

For our anniversary, we bought each other expensive watches, something I probably would not do today. There was a pervasive feeling inside that this bear market thing was endless, so you might as well enjoy the fruits of your labor today. It might be a rationalization, but I think allowing myself to loosen the purse strings a bit, swung the pendulum toward a better balance point, easing the tension between saving/investing and spending.

But I did continue to invest retirement contributions and some taxable income primarily into stock mutual funds. I was probably in the 75:25 (stock:bond) ratio, +/- 10%, throughout the 2000’s.

Without warningor much fanfare, the declining market turned up. It’s true that nobody rings the bell at the bottom. I have no recollection of the transition back to the bull market, when I recognized it, or how I felt, but it seemed like I woke up one day, and we were no longer steadily hemorrhaging money on paper.

Though the number on the monthly statements was getting larger, there was no rebound euphoria. An upward trending market was expected, almost an entitlement, while a down market was abnormal, an aberration, even painful.

You learn quite a bit about your investing self in a bear market, and I know that I handled the even-more-disastrous 2008 considerably better as a result of my previous experience.

Lessons Learned in My First Bear Market

Some things that I learned in 2000-2002 that helped me in the next Big Bear market:

1. Do a better job with diversification. I made sure that I was distributing my stock exposure more evenly throughout the Morningstar large-mid-small and growth-blend-value boxes. I made sure that I had a decent allocation to international stocks and REITs, and I reupped on my commitment to fixed income.

2. In down stock market periods, check your balances and statements less often. Avoidance of unactionable, negative news is good for the psyche (and this trick works well outside personal finance, too).

3. Live life along the way, and if you have a doctor salary, there is probably plenty of fun stuff to do with it. Vacation, hobbies, occasionally luxury splurges (ie. “Selective extravagance”), etc. No use having the biggest, largest portfolio in the graveyard, especially if you did not live a little while you were alive.

4. There is much bravado in saying “bring on the bear market, so I can buy stocks on sale.” But when it actually happened, and persisted for a while, I recognized that I had become attached (even anchored) to a high paper net worth. As I slid further away from my Number, despite regular contributions, it caused me no small amount of distress.

“Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You can not convey to an inexperienced girl what it is truly like to be a wife and a mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.”

I did my best with words (if not pictures) to describe my emotions and actions as I experienced my first bear market. I hope reading of some of my mistakes and maneuvers can allow others to sail more smoothly when the next bear market comes roaring.

37 comments

Well written post as usual. I was actually in Las Vegas attending a Louis Rukeyser convention of 11000 people who watched his PBS TV show wall street week in March of 2000. I met all kinds of famous money mangers at this meeting. (All loaded funds.) I even got my picture made with the guy. I was euphoric. I was 43 and the youngest person of the 11000. (It filled the MGM grand arena). No one knew this was the top of the market. Vagabond I was on the phone with my broker actively buying CSCO from the hotel room as the drop started. I was thinking what a great buying opportunity this was. The late 90s were pure euphoria for me. I really believed I was going to be very wealthy. Plus I was having a great time. Every dollar of extra cash went into the market. I was dating a stock broker at this time and I am sure this added to the mania. I learned I was going to be comfortable but not super-rich. I think I turned off CNBC because of 9/11 and never went back to watching the tape and listening to earnings reports. I am certainly not euphoric about the recent market but that may be because of past experience. I would advise people never to wish for a bear market because you really do not know what you will do.

Ha! I remember the Friday evening Lou Rukeyser show and how much I enjoyed watching it. We have a family friend who was a regular, featured guest, and I was in awe of him.

Yes, you were probably the youngest person there by about 20 years (!) no doubt. Fun times, for sure, but not lasting. I do prefer the boring index era of today. It’s much less taxing on your mind and emotion.

Unfortunately what you say rings true that until you experience one yourself you never know how you will react in a bear market.

It’s easy to say that you will have a great risk tolerance and buy stocks on sale but when reality hits, doing it is different.

In this recent long bull run everyone looks like a genius investing. Curious to see how it plays out at the first sign of trouble.

The other unintended effect of a total index fund in stocks for example is that because it is cap weight based, if there is a bubble in a particular sector, we can get over weighted in it and take a bigger hit when it bursts.

I know you can do sector weighting for a portfolio to counter this but it is more expense and more hassle. What are your thoughts on this?

In the 2000-2002 Bear Market, the tech and large growth stocks (more generally) were decimated, and there were pockets of relative outperformance in other areas (small cap value and international, in particular). This led me to further diversify my portfolio.

At one point, at the suggestion of a doc friend who had similar interest in investing, my goal was to evenly fill the Morningstar 3×3 style box . That is aim for 11% each in small value, small blend, small growth, mid value, mid blend, mid growth, large value, large blend, and large growth. This is probably not ideal for other reasons, but this approach would certainly combat the over concentration on the handful of names at the top that seem to drive overall market returns. It would an interesting concept to backtest.

Vagabond with another great post. I definitely am not wishing for a recession or a bear Market. I like to see my net worth increasing every month and while mentally prepared for a drop still don’t want to deal with it.

Stick to your plan. It shouldn’t change in an up market and it shouldn’t change in a down market. So you can stop watching the market. Since I won’t be making any changes, I don’t watch the market anymore. You shouldn’t either. If you will not change your therapy based on the results of the test, don’t order the test.

Great post. I started investing in 1997. Double didgit returns were the norm. The bear market that began in 2000 taught me that investing is a long-term endeavor. Experiencing three or four years of negative returns opened my eyes to the required behaviors that are required to keep buying when there was zero hope in sight. During those years, I learned to just keep saving and investing while finding other things to follow other than the markets.

Yes, that was one of my lessons, as well. The stock market was my main hobby for the first few years of practice. The 2000-2002 Bear Market made me get some new hobbies, ones that were healthier for the body and the psyche than the stock market.

A great post for younger physicians. I tell them it is really easy to talk about your risk tolerance and base your investment strategy around what you THINK you would do. However, you do not really know what it is until it is tested during a bear market. I remember how everyone was no longer happy making 5-6% a year, they wanted 5-6% per week or month. It was crazy. Everyone had a “story” about the stock they bought and doubled their money on in a month. Fortunately, I had a disciplined senior partner that I emulated. I stuck to my 3 mutual funds and never changed. Of course back then you got a paper statement in the mail each month and you did not get to see your portfolio dropping each day. I wonder how much that helped stay the course.

Yup, everyone had a story. You could walk into the Doctor’s Lounge, and hear about all of the experts getting rich.

My favorite story was the ne’er-do-well brother-in-law of a senior partner who put all of his money into EMC, a darling tech stock and storage company. He made millions (like $11M) and sold out of enough it to be wealthy for the rest of his life.

The daughter of a surgery colleague, a very hard working thoracic surgeon, married a twenty-something guy who made millions working for Akamai (tbh, I don’t know WTH they do). She told her father that she was concerned he was working too hard, and if he wanted to cut back, they would support him.

Reading your excellent post still caused some mild visceral pain from remembering the first bear market I experienced in 2000. All the docs in the doctors lounge gradually stopped talking about stocks and “portfolios.” 2000 and 2001 were painful years. I still kept equity investing through those years but the joy was gone. And like you, I opened the purse strings a bit, which was a healthy thing to do in retrospect. Investing became just another job. But I survived and learned from the experience. I just index and try to be very unemotional about investing. And now that I’m 55, I also keep a large amount in cash CD’s. Cash is a nice, comforting luxury during bears and it is a nice thing to be able to afford holding a lot of cash now in older age.

Thank you for reading and posting. It looks like we are on similar paths with similar mindsets (I am 52). The current generation of physician financial bloggers, talkers and mentors seems to have little respect for cash. Those of us who have lived through some bear markets value it quite a bit more, especially in the later innings of our careers.

My first bear market was the great recession of 2008-9. Back then, I was a new resident. For me, the recession was a good thing because it brought the housing market down in Los Angeles (where I trained) to more affordable prices. I was able to negotiate a good deal on renting an apartment near work. Everything else seemed to a lot cheaper too (including stocks of course!). Traveling became cheap too. Airlines and hotels were promoting sale after sale and many were handing out points and miles left and right. It was the perfect opportunity for travel hackers and lovers of travel like me.

While the economy tanked and took some time to recover, my resident salary was stable and increasing with every year. I saw no investment losses because I had no investments to begin with (residency was my first real job). During this time, I maxed out my retirement accounts, started paying off my student loans, traveled some, and had a lot of fun (like you I invested in fun because back then fun was so cheap!). I did all this on a typical resident salary 🙂

I’m still young with a 20+ year investing horizon, so my asset allocation remains on the aggressive side.

Thanks for adding your perspective, Dr. McF! Yes, as a resident, one is mostly sheltered from the downsides and can take advantage of low prices all around. Imagine how things would look if you were starting your residency in LA today. Quite a bit different, no doubt.

Oh I know… housing prices these days are barely affordable on a lowly resident stipend . I would have a tough time maxing out retirement accounts and paying off student loans would be much more of a struggle.

Thanks Vagabond for an excellent recap of your sensations during a Bear market. I’ve witnessed three and have had skin in the game during the last two. I now view bear markets as financial stress tests which can vary through the course of a lifetime. I started as an equities only investor, whether mutual funds or individual stocks. During the early accumulation phase of my career that was fine, even during the dot-com bust I just kept adding to my portfolio. The Great Recession of 08-09 definitely caused EKG changes on my stress test. I ended up selling about a third of my positions on the way down. My personal investment plan morphed to include an appropriate bond position so I could sleep at night. Since I am winding down my career and no longer accumulating, I definitely needed a more conservative approach. The next bear is coming, we just don’t know when. I am planning on passing the next stress test but I always keep in mind the words of Mike Tyson, “Everyone has a plan until they get punched in the mouth”.

Yes, course correcting amid the turmoil is not ideal, but we do what we need to do to keep our sanity and stay afloat. I am much more conservatively postured than I was in either 2000 or 2008 and intend to remain that way.

Wise words from a wise physician. I would expect nothing less. It will be interesting to see how younger physicians react to the next bear market. I experienced the last one with little skin in the game but enjoyed watching it play out on the Bogleheads’ forum. I hope you will be there on the WCI forum as a voice of reason when the blood is running in the streets.

The 08-09 Recession really rattled me. Until then the other recessions had been an inconvenience. But by 08 I was giving FIRE way more serious thought, and had ramped up my savings and mortgage payoff rates to the point that it pinched my budget. I’d basically throw everything left at end of bill paying for pay period into mortgage principal and didn’t splurge on anything.

Well, when my employer started making noises about letting some of us go, and my HELOC got frozen, I backed off of the aggressive mortgage repayment and started padding my cash account. I’d been counting on the HELOC in case of emergencies, although I had not yet needed it. Suddenly it was gone and I had little cash on hand. THAT and the layoff noises were keeping me up at night until I had a decent cash savings account, and had worked up a plan (in my head at least) for how I would cope with a layoff.

Thankfully the layoff never happened to me. The economy improved. I had never stopped the max 401(k) and Roth contributions, rebalanced about once a year, and as the economy improved I noticed the benefit of buying into the funds when they were “on sale”… my retirement accounts were growing like crazy, far beyond the paycheck/employer contributions. And I went back to aggressively paying off my mortgage.

I had seen my mother successfully go through this bear/bull market swing in the 80s with her retirement account, and that helped me stay the course when the market was still tanking. I did not exit the stock market like some other people did… but I quit checking my accounts so often, and kept on contributing as much as was allowed. I do have to say it paid off, but it is NOT for the faint of heart. It’s basically done on the faith in dollar cost averaging, and knowing the economy is cyclic in nature.

Thank you for sharing your own experiences. The recession and drawdown may be short in retrospect, but when you are in the middle of it, it can be scary and feel like it will never end. Hopefully, we are all in better financial shape for the next one.

A bear market tests you like you kids do not know. I chuckle at all of these of these web sites and early retirees. I have been investing since 1992 and have experienced 2 50% declines. You have no idea at all until you experience it. This site, WCI, 1500 days, etc., make me chuckle. Enjoy your early retirement!

I was having a discussion over a beer with a colleague this evening. One element that is under appreciated is that not only are your investment accounts in free fall, but people around you are losing their jobs and their homes. The negativity goes way beyond the balance of your 401k. It can be quite frightening.

I’ve always been very interested in personal finance, read a lot of forums, magazines, books after I graduated from residency in 2003, in my first bear market 2008-2009, I remember vividly that it was very painful to apply the concept of buying low, especially with all the grim news on TV and radio, also watching my portfolio going down when I’m buying more, but I stuck with it and when Dow went below 10k, I sold ALL my bond holdings and went 100% equity, rode all the way down, buying at the same time with whatever money I can get a hold of, long story short, it was the best decision ever. Not sure how I did it, but at that time I was even ashamed to tell anybody what I was doing, i was buying when I hear from others saying “sold everything before the crash” or “got out just in time because I put a automatic sell when it hit $X”

Few things to ponder… CASH…I totally agree with fully liquid positions but if you are sitting on mattress money that’s losing 3% per year on inflation. Even short term CDs would be better option than pure cash (ever consider a CD ladder– Financial Samurai had a great post on that recently), plus there are a lot of other options to hedge against inflationary pressures as well that are liquid as well (consider GOLD for small portion of portfolio etc.)

Looking toward downturn great time to trade out of paper assets… think MULTIFAMILY property investment in B or C class neighborhoods…… in good markets, folks need to rent… in bad economies folks need to rent.

When economy goes sour folks in A class properties(the hippest most sought after neighborhoods) seek B… Bs (good schools and desireable) go to Cs… and Cs (schools typically Meh & you’d still live there if you had to but potentially a transitional neighborhood and nonviolent crime often not uncommon in these areas) will do anything to stay in C class as D class is war zone and NO one lives in those unless you are forced to.

Yes MFRs are like other asset classes inflated a bit but if invested in a solid >100 unit property in a good location with a good operator at the helm… you can be sure of tax advantaged cash flow coming in quarter after quarter regardless of the economy … and sure the CoC will be less in a down economy or even potentially flat but you don’t take a 1/3 haircut like paper assets do overnight (like FB did a few weeks back) and as long as the operator financed the deal reasonably (long term agency debt) and has good cash reserves and DSCR (debt service coverage ratio) is good to go, then vacancies can go up and your money and investment still looks pretty darn solid.

Now can you make massive gains quickly like a paper asset? Nearly never (unless you bought a MFR property in DFW in 2010-2014 and then you look like a genius). But good fundamental markets (strong job growth, strong pop growth in landlord friendly states (TX, OH, TN, AL, CO, AZ, FL are a few off top of my head) with strong operator in a good neighborhood… that’s easy sleeping knowing your investment is rock solid and backed by real asset and nothing a hacker from Russia could disrupt that cashflow or even worse a war or other coflict… regardless of economy folks need a roof over their head. Since that need never goes away, the need for MFR never goes away.

Great article. I didn’t invest in 2000-2002, but I did in 2008-2009. It was shorter, so I think a little easier to stay the course for me personally, although it was quite steep. I bought all the way down and all the way back up the other side. But I can remember thinking and writing about how REITs could go all the way to zero (that was after they were down 78%). The market turned within a few days of that forum post.

Great article, Vagabond. I remember feeling sick to my stomach during both the 2000-02 and 2008-09 bear markets. At one point, I didn’t want to login to my accounts to avoid feeling depressed and told myself everyday not to do anything stupid. Even daily commutes weren’t spared to make you feel miserable (remember billboards saying “your 401(k) becoming a 201(k)?”). I started becoming more spiritual at that time to help me cope (it helps if you take a philosophical approach to life during stressful times!).

You are right that it was a huge relief when it all got over and balances started recovering. Unless you have personally experienced severe bear markets, you have no idea of your true risk tolerance. This is why I recently reduced my stock allocation to 60% after having been at nearly 100% equities for last 5 years.

My first bear was in the 80’s but I didn’t have much money then. Investing was a whole different ball game and very expensive. My broker charged $200 a trade or $400 round trip. No ETF’s, mutuals charged 3-5% loads, you spent your time researching money managers and funds. Vanguard was barely on the radar. The only thing to save you was money in every month and to try and buy stuff on the cheap. This is where the idea of index funds came from, no ridiculous fees or loads. That was Jack Bogel’s creative destruction to the finance industry. We haven’t done all that well since 2000. The average inflation adjusted S&P return for the 17 years since 2000 is under 3.5% not all that much better than bonds (2.5%) I sure as heck wouldn’t be wishing for a bear. Slow and steady wins. My self delusion is to consider my portfolio as property not money. The value of property floats in the market but if you own more property eventually the market will float up. I believe in buy low sell high. Re-balance is a mechanical way to re-balance. Whatever is high, a small bit gets sold to re-balance and is added to what is low. So on the way up money is added disproportionately to what is low typically bonds. When the bear comes however bond money gets sold and stocks get bought (low). That bond money buys you more property and if you follow the rule it will save you when you’re otherwise too scared to pull the trigger. I recently wrote a paper over on xrayvsn

which address some of the magic of re-balancing as a means of portfolio insurance against SORR. The other thing is yearly investing, once again he who owns the most property wins. Keep buying that property and reinvesting the dividends re-balance as further risk management, have a nice life. When you’re ready to pull the plug on the gig you’ll be all set.

Great article Vagabond. Like you, I’ve been through two major bear markets in 2000-2 and 2008-9, and neither was a pleasant experience.

So many who post in comments on financial blogs and forums advocate for a 90%-plus equity allocation, and I am concerned that many readers could perceive that this aggressive equity allocation is normal.

In the past it was common to consider a “balanced portfolio” as 50-75% equities. These days it seems that someone like me with a 60:40 equity:fixed allocation is viewed as being overly conservative.

Many young investors may find that their risk tolerance is not a high as they initially thought once they’ve been through their first bear market. It would be far better to have a deep and honest appraisal of one’s risk tolerance while markets are still running high, rather than risk panic selling of a 90% equity portfolio after a severe market correction.

October 1997 was my first crash followed by 2001 tech stock crash (of which I owned zero PE ratio 60?? WT*?) Then Fall 2008. What I learned through pattern recognition and Graham/Dodd Security Analysis was that value stocks were worth acquiring just about always. I’ve always kept since then a healthy amount of cash on the sidelines to take advantage of these market mismatches. They happen routinely.